Migration of Participating Securities Bill 2019: Second Stage

Minister of State at the Department of Finance (Deputy Patrick O'Donovan)

I move: "That the Bill be now read a Second Time."

The Migration of Participating Securities Bill comprises 17 sections and provides a legislative mechanism to facilitate the migration of Irish securities from their current central securities depository, CSD, Euroclear UK, to another European Union based CSD. On behalf of the Minister for Finance, I would like to provide Deputies with some background information on the CSD migration project and the reasons for bringing the legislation forward. Central securities depositories are specialist financial institutions that hold securities and facilitate trading between market operators. CSDs are a vital and systemic part of financial market infrastructure that enables the efficient trading of financial instruments such as shares by allowing ownership to be easily transferred between parties.

Most countries have a domestic CSD traditionally associated with their stock exchange. However, due to the close historic links between the Dublin and London stock exchanges, the Irish market relies upon a CSD based in the United Kingdom called Euroclear UK, which operates the CREST settlement system. Once the United Kingdom becomes a third country, under the relevant European legislation, the Central Securities Depository Regulation, Euroclear UK will no longer be able to passport its services from the UK into Ireland. In December 2018, as part of its Brexit contingency measures, the European Commission adopted a decision granting equivalence to UK CSDs until March 2021 in the event of a hard Brexit. As a result, Euronext Dublin, formerly the Irish Stock Exchange, announced in October 2018 that it would transfer the settlement of trades in Irish equities and other exchange-traded instruments to Euroclear Bank Belgium, a CSD based in the Eurozone. Most European CSDs operate what is known as an intermediated holding model. In order for Irish issuers to migrate to one of these alternative CSDs, the title of the participating securities must be transferred from the current holder to the designated CSD or its nominee. It is important to note that while the title will be held by the CSD's nominee, the ultimate investor who remains the owner of those shares will continue to be able to exercise voting rights and participate in corporate actions through the intermediated chain of holding.

Since the beginning of the migration project, officials from the Department of Finance, the Department of Business, Enterprise and Innovation and the Central Bank of Ireland have been engaging intensively with stakeholders across the Irish market. One outcome of that engagement was a request from issuers and the Irish legal community for a legislative mechanism to facilitate migration by providing for the transfer of title to the migrating securities by operation of law. In the absence of an alternative legislative mechanism, issuers would instead have to rely upon a scheme of arrangement under Part 9 of the Companies Act 2014. To effect transmission of legal title to securities to a CSD in this manner would involve all of the relevant issuers having to pursue individual schemes of arrangement through the High Court. This would be a time-consuming, expensive and uncertain option for issuers. On 17 July 2019, the Government approved the drafting of the general scheme of the Migration of Participating Securities Bill to facilitate the migration of Irish issuers.

Since that time, the Departments of Finance and Business, Enterprise and Innovation have been working with all interested stakeholders, and the Office of the Attorney General and the Office of the Parliamentary Counsel, on the proposed legislation.

The legislative mechanism, as provided for in the Migration of Participating Securities Bill 2019, will allow for a more orderly migration of the market from Euroclear UK ahead of the March 2021 deadline. An early enactment of this Bill will also facilitate the holding of the necessary shareholder votes during the upcoming 2020 annual general meeting season, avoiding the need for separate extraordinary general meetings to be called. It is important to note that the availability of the legislative mechanism does not preclude issuers from deciding to use an individual scheme of arrangement to migrate, but it does address a number of the identified risks, provides certainty and reassurance to the market and increases the likelihood of a successful migration for each issuer. In addition, it would also give the market confidence that an orderly migration can be completed by the deadline.

I will now turn to the Bill and some of its key provisions. Section 3 provides for a definition of "migration" and that a reference to "migration" is to be interpreted as the title to those migrating securities becoming and being vested in the nominated central securities depository, or a body nominated by that central securities depository with respect to its operation, as a central securities depository for the purpose of recording those securities in book-entry form and the settlement of trades in those securities. This section also provides clarification that the provisions of the Companies Act 2014 will continue to apply to those issuers that have migrated, and nothing in the Act shall operate to divest security holders of their relevant rights and interests in the participating securities.

Section 4 sets out the conditions that an issuer must satisfy in order to consent to migration of its securities and that migration as provided for in this section will have effect notwithstanding the Companies Act of 2014 or any provisions in the participating issuer's constitution.

Section 5 sets out the conditions that must be complied with in order for an issuer to consent to migration including: passing a special resolution specifying the CSD to which the securities will migrate; the name of the member state in which the designated CSD is authorised; if applicable, the nominated body to which the title to the securities will transfer; confirmation that the CSD is authorised in a particular member state; and certain conditions that must be met in order to name a CSD in the special resolution, including that the issuer has notified that depository in writing of its intent to migrate to it, that the depository has provided a written statement to the issuer with regard to its obligations under Article 23 of the CSD-R, that the securities have been accepted for admittance by the depository and that, if not already in place, the CSD will have obtained authorisation to passport its services into Ireland on and from the date migration will take effect.

Section 6 sets out further conditions that an issuer must comply with in order to consent to migration, in particular the content of the circular that must be issued to the issuer's members with the notice of the meeting to vote on the special resolution, including: an explanation of the proposed migration and its impact on the members; an explanation of the options available to those members that do not wish to have their shares subject to the migration; an explanation of the options available to those members that currently hold their shares in certificated form that wish to have their shares included in the migration; a summary of the relevant laws in the member state in which the CSD is authorised; a list of the documents related to the migration and where they can be accessed or otherwise inspected; and a recommendation from the directors of the issuer on the merits of the proposed migration, including a timetable of key dates in the process and any other information considered relevant to migration.

Section 7 provides that an issuer or its officer that defaults in complying with the provisions of sections 5 and 6 shall be guilty of an offence. Section 10 provides for the necessary filings to be made by an issuer in order to confirm that it has complied with the requirements of the legislation and is ready to migrate, including a filing with the listing authority and a statement provided by the directors of compliance with the legislation in the form of a sworn affidavit. The listing authority must maintain a list of issuers that have completed their filings and publish the list on its website. An issuer or its officers that default in complying with these provisions shall be guilty of an offence.

Section 11 provides for the disapplication of certain provisions of the Companies Act 2014 that are not relevant to a CSD in the conduct of its function. For the purposes of migration, section 94(4) of the Companies Act 2014, requiring a written instrument of transfer, and section 99(2) of the Companies Act 2014, requiring an issuer to issue share certificates to the CSD, shall also not apply. This section further disapplies section 18 of the Competition Act 2002 and section 8(3) of the Irish Takeover Panel Act 1997 so that the transfer of title to the CSD for the purposes of migration does not trigger statutory change of control provisions in those pieces of legislation.

Section 12 provides the listing authority with the relevant powers to set, by order, the live date on which the title to those participating securities will transfer. The listing authority may also set dates past which it will no longer accept further filings and it may vary the dates set in the relevant orders, if necessary.

Section 14 provides the Minister with the necessary powers to make regulations prescribing anything required by the Bill to be prescribed, which includes a prescribed form for the purposes of section 10, and requires that such regulations be laid before the Oireachtas, whereupon they may be annulled by resolution within 21 days.

Section 15 provides that no liability will attach to the listing authority in fulfilling its obligations under section 12 or any other function it may carry out under this Act.

Section 16 repeals section 4 of the legislation on 30 March 2021, which is the date set down in the European Commission's equivalence decision for UK-based central securities depositories in the event of a hard Brexit. This will mean that the other provisions of the legislation will remain in effect after 30 March 2021 but it will not be possible for an issuer to avail of this migration mechanism after the cessation date as it would not be able to consent to migration without the provisions of section 4 being in effect. The Minister may extend this date if the Commission extends its equivalence decision to a later date, subject to the approval of the Oireachtas.

The Leas-Cheann Comhairle will forgive me if I am not able to answer table quiz questions on what I have just read into the record of the Dáil, but I commend the Bill to the House.

Deputy John Brassil

I welcome the opportunity to speak on this Bill. Since the UK's decision to leave the European Union in May 2016, there has been an almost constant sense of upheaval and uncertainty. We have already seen the Article 50 deadline extended twice and, in both instances, a no-deal Brexit was very much on the table. Today, we still live with the uncertainty of Brexit. The UK is going to the polls in just a few short weeks and the Government that results will dictate the course of Brexit. If, by the end of January 2020, the deal as has been currently negotiated is passed, the UK will have left the European Union. What will commence then is the work on putting in place a free trade agreement between the UK and the EU. This will not be a simple task and the deadline enshrined in the agreement of the end of 2020 will not make matters easier.

Notwithstanding the political uncertainty surrounding Brexit, the uncertainty felt in the business community has already had a real impact. While it has been said many times that uncertainty is bad for business, it cannot be underestimated. Businesses that otherwise would be in a position to invest, to grow, to create jobs and to expand into other markets are reluctant to do so because of the Brexit uncertainty. In the financial sector, it is no different. In the struggle to bring certainty to an uncertain situation, comprehensive changes are often needed, such as the one behind this Bill.

Brexit has not gone away, nor will it go away for some time. In order to bring political certainty and to provide the Government with the stability to negotiate Brexit, Fianna Fáil extended the confidence and supply agreement to cover a fourth budget. That budget, presented in October, came at the most uncertain of times, when a no-deal Brexit was a distinct possibility. Thankfully, on that occasion, that scenario was avoided. While we have given the Government the space to protect Ireland from a no-deal Brexit, we have been critical of the Government's preparation for Brexit. The Government was far too slow in hiring extra staff to deal with customs checks, it was too bureaucratic in rolling out vital funding for SMEs in the agrifood sector and it gave very little clarity on what would happen in a no-deal scenario. This lack of preparedness, I believe, added to the uncertainty in the economy. Earlier this year, the Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Bill 2019 was passed with the support of the Fianna Fáil Party.

This legislation follows on in that vein.

The financial services sector in Ireland is a huge part of the economy. Like any economy around the world, Ireland needs a fully functioning, efficient and trustworthy stock exchange. For Irish companies to grow and compete on a global scale and to access vital funds, they need to be on the Stock Exchange. Before Brexit, Ireland enjoyed an economic sweet spot. We were attractive to US firms and investment funds, were part of the European Union and had a crucial historical connection to the financial services sector in London. After Brexit this changed significantly.

One of the many changes was to how our Stock Exchange works. Each stock exchange requires a CSD to function properly. These institutions enable the efficient trading of securities on the Stock Exchange. It is critical for the functioning of any stock exchange that these mechanisms are in place, work effectively and provide confidence. Without confidence, stock exchanges simply do not work.

Due to Ireland's historical connection to the financial centre in London, the Irish Stock Exchange, now called Euronext Dublin, availed of Euroclear UK, which is a central securities depository in the UK. When the UK becomes a third country following Brexit, under European legislation the Irish Stock Exchange will not be permitted to use a central securities depository in the UK. It is for this reason that Euronext Dublin, the Stock Exchange in Ireland, announced last year that it will no longer use the depository in the UK but will move instead to a similar institution in Belgium. In order to facilitate this move, this legislation is required. This transfer will involve the migration of highly sensitive functions and information, and such a move needs to be properly authorised by shareholders in advance. The Bill lays out the ground rules for this move and sets out the company obligations needed in advance of it. Companies need to issue circulars to their shareholders in advance of the passing of a special resolution. The Bill outlines what information needs to be contained in the circulars and outlines the penalties if companies do not comply with the legislation.

I have a number of broad points to make on the Bill and the wider financial services sector. First, I must question why it has taken this long to bring this legislation forward. The decision by the Euronext Dublin Stock Exchange to move to the Euroclear Bank Belgium was taken in October of last year. Perhaps this has to do with resources, but why were these provisions not included in the Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Bill 2019 earlier this year?

Second, was consideration given to the establishment of one of these CSDs here in Ireland? Typically, each country with a stock exchange has a domestic CSD and there is no need to look beyond the country's borders. Here in Ireland we have relied for many years on London, and now we will rely on Belgium. I will ask a simple question. Would it not be preferable to have our own CSD here in Ireland? We would not have to rely on other countries if this facility were present in Ireland. Perhaps the Minister of State could address this in his response.

Third, I wish to raise the issue of the international financial services sector in general. Since the establishment of the IFSC in Dublin in the 1980s, this sector has grown from strength to strength. Ireland is home to among the biggest financial services companies in the world and plays a crucial role in the global financial world. Earlier this year the Government published its updated roadmap for the industry, which I welcome. The industry has been seeking legislation governing limited partnerships for a number of years now. The limited partnership model is preferred by many North American private equity funds, and at present we appear to be at a distinct disadvantage in attracting these types of funds to locate here. Fianna Fáil welcomed the publication of the Investment Limited Partnerships (Amendment) Bill 2019, yet since then it appears to have fallen off the radar. The Bill passed Second Stage in September but has yet to see the light of day in the finance committee. Passing that legislation would be a great boost for the sector in Ireland and could lead to substantial jobs growth in Dublin and throughout the country. Perhaps the Minister of State could provide an update on the legislation in his response.

Fianna Fáil will support the legislation before the House tonight. It is crucial for Ireland Inc. to have a seamless and smooth transfer to the new system. We look forward to engaging constructively with all parties to get the legislation passed in a timely manner in order that companies can make the arrangements required to move to Euroclear Belgium.

Deputy David Cullinane

I am sure the Minister of State will agree that this is not the most important Bill that will come before the House in his time - that is for sure. It is a highly technical Bill which seeks to make a contingency provision for the transfer of the settlement of trades in Irish equities and other securities from CREST in London to Euroclear in Belgium as a result of the uncertainty surrounding Brexit. I will speak briefly on the substance of the Bill.

While acknowledging that the Bill is technical in its provisions and that we in Sinn Féin would rather focus our attention on people's priorities and not on the interests of big finance, we recognise that this is a contingency provision to respond to the change brought about by Brexit. CSDs allow the transfer of securities and financial instruments through electronic book entries in a central register rather than through physical delivery. These CSDs exist in every EU member state for the ownership transfer of securities, except in Ireland. As one might predict, Ireland has relied on a CSD based in London. This CSD is operated by Euroclear, which uses a settlement system known as CREST. Like so many things, these CSDs are subject to EU rules and regulations; and like so many things, Britain's exit from the EU will call into question Ireland's reliance on the CSD in London. Because of this, the Irish equity market has had to rethink its reliance on the London CSD and has been able to rely on this Government's high regard for its interests.

In October 2018 Euronext Dublin announced it would transfer settlement of trades in these securities from CREST in London to a CSD based in Belgium. This raises the question, why are we not setting up our own CSD? It also raises the question, if we leave or Belgium leaves the European Union, where will these security settlements then move? I question why we cannot set up our own CSD on the Dublin Stock Exchange. Perhaps the Minister of State could address this issue later. Because of Brexit uncertainty, the European Commission has allowed a temporary equivalence for CSDs located in Britain to allow the Irish market to continue using the current system until March 2021 in the case of a crash-out Brexit. As a result, the Irish market must move elsewhere before March 2021, and Belgium is the destination. Following the decision to move its settlement to Euroclear Bank Belgium, I understand a White Paper was published in May to set out a new model for the market. I also understand that the paper was based on legal advice provided by Arthur Cox. I congratulate Arthur Cox on another injection of public money into its coffers.

As I said, this is a highly technical Bill on an issue that concerns the settlement of securities trading. We look forward to scrutinising the Bill in greater detail on Committee Stage. For now, I ask the Minister to address my concerns about the fact that the CSD for the Irish market will move to Belgium and will not be based on the Irish Stock Exchange.

Minister of State at the Department of Finance (Deputy Patrick O'Donovan)

On behalf of the Minister, Deputy Donohoe, I thank both Deputies for their contributions. Deputy Cullinane is right: this is a very technical Bill. One could appreciate that from the introduction given to it.

To respond to Deputy Brassil's comments - and much of this can probably be dealt with in more detail on Committee Stage by the Minister - the Brexit Act the Dáil passed dealt with the eventuality of a hard Brexit. There was a specific provision in the Act that the CSD could continue in the UK under that legislation. However, this legislation deals with much longer-term provisions that are needed now that we know that the United Kingdom will no longer be a member of the European Union. Furthermore, it is important to point out that the legislation has been drafted as quickly as possible, given the request industry made.

To respond to Deputy Cullinane's point about CSDs, this is a commercial entity, not a Government-established entity, so it would not really be up to us to establish it. I was not interrupting Deputy Cullinane when he was speaking; I was just checking this with my officials. No provider came forward with a view to looking at the Irish market.

This can be discussed further on Committee Stage when the Minister for Finance, Deputy Donohoe, will be able to provide a greater level of detail but I presume the issue is scalability. Ireland is small and historically we have hitched our wagon to the UK. Again, this is a market-led solution. Providers are also subject to European legislation that enables them to operate within the European Union and to provide services via the Union in what could be described as a passport-type situation.

The deadline is tight. This must be completed by March 2021 in accordance with the European Commission's contingency planning. That timeframe is challenging and the co-operation of Members of this and the other House will be very welcome in that context. I believe I have answered the questions posed by Deputies Brassil and Cullinane. If they have further questions or require a greater level of detail, I am sure the Minister for Finance will oblige on Committee Stage.

Question put and agreed to.

Dáil Éireann díospóireacht - Tuesday, 26 Nov 2019